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Investors want fewer Modi slogans, more substance

MUMBAI   Prime Minister Narendra Modi has a thing for campaigns. "Skill India," "Clean India," "Digital India" and most famously "Make in India" have all been launched on his watch. In January, Modi appeared before a group of foreign and domestic entrepreneurs and announced yet another initiative: "Startup India, Stand up India."

     The objective is to nurture innovation, generate employment and accelerate economic growth. "All of you have a vital role to play in the future of India," Modi told the audience.

     India, of course, already has a vibrant venture scene. But the government has only now defined what, exactly, it considers a startup -- a company that has been in business for less than five years and has turnover not exceeding 250 million rupees ($3.63 million).

     The government's 2016-2017 budget, announced on Feb. 29, reduces the time period investors in startups must hold their stakes before qualifying for the long-term capital gains tax break, from three years to two. It also includes a capital gains tax exemption for funds investing in startups, with certain conditions; grants startups a three-year income tax holiday; and promises faster incorporation procedures.

     The budget, however, remained silent on a tax exemption on investments made above fair market value, promised in an earlier action plan.

      A fund will be set up to support venture capital and private equity investments, with the total corpus to reach 100 billion rupees over four years.

     Modi's initiatives have received mixed reviews. "We are tired of the campaigns," said an official of a Japanese manufacturer with operations in India. "On the ground, not much is changing on the regulatory front."

     When Modi took power in May 2014, reforms were expected to pass with little trouble, since his Bharatiya Janata Party has a majority in parliament. But the opposition has managed to stall key legislation, including a land acquisition bill and the introduction of a goods and services tax. 

     The GST is designed to unify India's inchoate indirect taxation system, while the amendment to the land acquisition law seeks to expedite the process. Buyers would no longer be obliged to conduct social impact assessments. A consent clause, which requires private buyers and public-private partnerships to obtain permission from certain ratios of affected landowners, would also be changed or scrapped.   

     Retrospective taxation -- another matter Modi has promised to deal with -- is also deterring foreign investors.

     In announcing the budget on Feb. 29, Finance Minister Arun Jaitley issued a one-time offer for resolving disputes related to retrospective taxes and promised a stable, predictable taxation regime. Interest and penalties will be waived if companies that are contesting such taxes withdraw their cases and pay what they owe.

     In mid-February, as the government was hosting a weeklong "Make in India" event in Mumbai, U.K.-based telecommunications company Vodafone lashed out after it was served a 142 billion rupee capital gains tax bill.

"COMPLETE DISCONNECT"   Vodafone has been fighting with the government over taxes since 2007, when it acquired a 67% stake in the Indian mobile phone business owned by Hong Kong's Hutchison Whampoa -- now CK Hutchison Holdings. The telecom company said that although Modi is "promoting a tax-friendly environment for foreign investors," there is "a complete disconnect between [the Indian] government and the tax department."

     "One is framing the policy, the other is implementing it," said Sunil Kumar Sinha, principal economist and director of public finance at India Ratings and Research. "While most of our policies have been progressive, the implementation has been lackadaisical."

     The success of Modi's campaigns, he said, will depend on how quickly the government can smooth the path for businesses -- large and small. "It is also the political art of managing state governments. Otherwise, it will be a grand scheme with no substance."

     India's federal structure means law enforcement, land and energy policy and some taxes fall under states' jurisdiction. With divergent laws and different political parties controlling state legislatures, coordination between the central and local governments is a challenge. 

     Sinha noted that some major investors have had bad experiences. South Korean steelmaker Posco in 2005 announced a plan to invest $12 billion in the eastern state of Odisha, but land acquisition delays and regulatory changes have made the project unfeasible.

     Another example is ArcelorMittal. The Luxembourg-headquartered steelmaker backed out of a project in Odisha because of delays in securing approval.

     Modi wants to build up India's manufacturing sector, aiming to make the country more competitive with a decelerating China. The goal is to raise the share of manufacturing in India's gross domestic product to 25%, from around 17% now. This is supposed to add 100 million jobs by 2022.

     But while India's population of nearly 1.3 billion and its relatively brisk growth rate are incentives for investors, some key indicators paint a worrying picture.

     The country's exports have been in decline for the past 14 months. In January, they fell 13.6% to $21.07 billion, from $24.39 billion a year earlier.

     The gross fixed capital formation rate slowed to 28.1% in the first half of the fiscal year ending March, from 29% a year earlier, according to an analysis of government data by Care Ratings. 

     The ratings agency said the total number of investment proposals in the first eight months of the fiscal year rose to 1,366, compared with 1,074 during the same period of last year. In value terms, however, proposed investment dropped to 2.02 trillion rupees from 3.22 trillion rupees.

GROWTH LEADER   Still, despite the regulatory obstacles, investors are not giving up on India. Asia's third-largest economy remains one of the most promising emerging markets. 

    Global and domestic companies pledged around $222 billion worth of investments during the "Make in India" event in Mumbai, held from Feb. 13-18. Even Vodafone announced a fresh 60 billion rupee investment in the state of Maharashtra, along with companies such as Vedanta, Twinstar Display Technologies, Hindustan Coca Cola Beverages, Raymond Industries and Mercedes-Benz.

     Maharashtra signed 2,594 memorandums of understanding related to various fields, such as energy, real estate, textiles, tourism, retail, medical and skills development.

     The World Bank predicts India's growth rate will reach 7.9% in 2018 -- putting it ahead of China at 6.5%. The bank based its projection for India on a reduction in external vulnerabilities, a stronger domestic business cycle and a supportive policy environment.

     But to keep the investment flowing, the Modi government will need to back up its campaigns and slogans with effective action.

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